[Federal Register Volume 60, Number 85 (Wednesday, May 3, 1995)]
[Notices]
[Pages 21841-21845]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10584]



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DEPARTMENT OF TRANSPORTATION

Office of the Secretary
[Docket No. 49844]
RIN 2105-AC19


Statement of United States International Air Transportation 
Policy

AGENCY: Office of the Secretary, Department of Transportation.

ACTION: Notice.

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SUMMARY: This notice sets forth a statement of U.S. international air 
transportation policy.

FOR FURTHER INFORMATION CONTACT: William Boyd, Office of International 
Aviation, Office of the Assistant Secretary for Aviation and 
International Affairs, U.S. Department of Transportation, 400 7th 
Street SW., Room 6412, Washington, DC 20590, (202) 366-4870; or 
Patricia N. Snyder, Office of International Law, Office of the General 
Counsel, U.S. Department of Transportation, 400 7th Street SW., Room 
10105, Washington, DC 20590. (202) 366-9179.

SUPPLEMENTARY INFORMATION: This statement of U.S. international air 
transportation policy, which was developed by the Department of 
Transportation in consultation with the Department of State and other 
executive agencies, sets forth objectives and guidelines for use by 
U.S. Government officials in carrying out U.S. international air 
transportation policy. It was first published in the Federal Register 
on November 7, 1994 to enable interested persons to comment.1 On 
January 6, 1995, the Department asked for comments on a related report 
prepared for the Office of the Secretary titled ``A Study of 
International Airline Code Sharing.''2 After reviewing the 
comments received on the policy statement and on the code sharing 
study, the Department of Transportation and other agencies have adopted 
the following final international air transportation policy statement.

    \1\An earlier statement of international air transportation 
policy and our request for comments on the statement was published 
at 59 FR 55523, Nov. 7, 1994.
    \2\Our request for comments on the code sharing study was 
published at 60 FR 2171, Jan. 6, 1995.
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United States International Air Transportation Policy

Introduction

    The availability of efficient international air transportation will 
greatly enhance the future expansion of international commerce and the 
development of the emerging global marketplace. Worldwide, travelers 
and shippers are demanding more and better quality service to more 
places. U.S. and foreign airlines are responding to this demand by 
expanding traditional forms of service and by developing new and 
innovative services. Increased demand and the variety of carrier 
responses to it challenge the existing intergovernmental system's 
ability to ensure the development of a competitive air transportation 
system that meets the needs of the rapidly evolving, expanding and 
increasingly integrated international aviation marketplace. In many 
cases, existing bilateral agreements impede the growth of the 
marketplace.
    We must address the challenges presented by these rapid changes to 
meet our future civil and military air transportation needs, and to 
provide our aviation industry with the environment and the 
opportunities that will enable it to grow and compete effectively in 
the world market. This policy statement outlines our approach to 
addressing those challenges.

Our Goal

Safe, Affordable, Convenient and Efficient Air Service for Consumers

    As established in our last aviation policy statement in 1978, our 
overall goal continues to be to foster safe, affordable, convenient and 
efficient air service for consumers. We continue to believe that the 
best way to achieve this goal is to rely on the marketplace and 
unrestricted, fair competition to determine the variety, quality, and 
price of air service. We believe that this approach will provide 
consumers and shippers with more and better service options at costs 
that reflect economically efficient operations and work best to:
     Expand the international aviation market;
     Increase airlines' opportunities to expand their 
operations;
     Increase productivity and high-quality job opportunities 
within the aviation industry;
     Address the nation's defense air transportation needs; and
     Promote aerospace exports and general economic growth.

Changing Environment

    Growing economic interdependence among nations--the 
``globalization'' of the world economy--has expanded demand for 
convenient, reliable and affordable international air service. Demand 
for international service is growing faster than demand for U.S. 
domestic service, and most major U.S. airlines are now providing and 
planning to expand international operations. Between 1983 and 1993, the 
international component of U.S. airlines' route networks, measured in 
revenue passenger miles (RPMs), grew from around 16% to over 27%. U.S. 
airline revenues from international air service nearly tripled from 
$6.3 billion to $17.6 billion. Moreover, forecasts indicate that U.S. 
carrier international traffic, measured by RPMs, will increase to 
almost one-third of their total system traffic by the year 2000.
    Just as important, the pattern of demand for international service 
has changed considerably. First, the regional distribution of U.S. 
carriers' international revenues has changed dramatically, as the 
primary focus of carriers' expansion moved beyond Europe to meet new 
demand in the emerging markets of Asia, the Pacific [[Page 21842]] Rim 
and Latin America. In 1983, the Atlantic accounted for 48% of our 
carriers' international revenues, while the Pacific accounted for 32%. 
By 1993, the Pacific had grown to 46% while the Atlantic was only 37%. 
The fastest growing sectors of the international aviation market are 
new and relatively undeveloped markets. During this same period, 
revenues in the Pacific grew 286%, in Latin America 151% and in Europe 
116%. Second, from 1983 to 1993, the number of international aviation 
city-pair markets in which U.S. airlines participate has grown by more 
than a third, reflecting the major expansion of air service and carrier 
networks throughout the world and the increased dispersion of demand. 
Many of these city-pair markets are relatively small, generating only a 
few passengers per day.

Towards a Globalized Aviation Industry

    The rapid growth of demand for international air service and the 
wider dispersion of traffic in city-pair markets are primary factors 
influencing the development of the air service industry. Carriers are 
increasingly finding that they cannot remain profitable unless they can 
respond to this changed demand. To compete effectively, carriers today 
must have unrestricted access to as many markets and passengers as 
possible.
    To meet demand and to improve their efficiency, many carriers are 
developing international hub-and-spoke systems that permit them to 
combine traffic flows from many routes (the ``spokes'') at a central 
point (the ``hub'') and transport them to another point either directly 
or through a hub in another region. Just as U.S. carriers developed 
hub-and-spoke systems to tap the broad traffic pool in the domestic 
market and to provide the most cost-efficient service for hundreds of 
communities that could not support direct service, international air 
carriers are developing world-wide hub-and-spoke systems to tap the 
substantial pool of international city-pairs. Internationally, an even 
larger portion of traffic moving over hub-and-spoke systems will 
require the use of at least two hubs (e.g., a hub in both the U.S. and 
Europe for a passenger moving from an interior U.S. point to a point 
beyond the European hub). This increases the complexity and 
interdependence of the components of the system (both the spokes and 
hubs) and the importance of multinational traffic rights to the success 
of the system.
    As a result, carriers wishing to establish global networks require 
a higher quality and quantity of supporting route authority than they 
have sought in the past. Airlines will become increasingly concerned 
with every market that enables them to flow passengers over any part of 
their system network. These airlines will be looking for broad, 
flexible authority to operate beyond and behind hub points, in addition 
to the hub-to-hub market between two countries. At present, governments 
operating in a bilateral context naturally focus on opportunities for 
their respective carriers to serve the local market between their two 
countries. In a bilateral context, services destined for or coming from 
third countries receive less consideration. In the future, governments 
will have to adjust their focus to bargain for the bundles of rights 
that will permit airlines to develop global networks.
    Carriers can either serve markets themselves (direct service) or 
provide service through commercial arrangements with other carriers 
(indirect service), whether on a traditional interline connecting basis 
or under a closer commercial agreement between the carriers, such as 
code sharing. Carriers will develop service products--single-plane, on-
line connecting, interline connecting, joint service--that respond to 
the preferences of the traveling public as measured by passenger 
willingness to pay for differences in the quality of service and that 
take into account their cost structure and market strategy. To the 
greatest extent possible, airlines should be free to set prices and 
offer various service products in response to passenger preferences.
    Significant challenges face carriers wishing to develop 
international networks using their own direct services. They need:
     Substantial access not only to key hub cities overseas, 
but also through and beyond them to numerous other cities, mostly in 
third countries. This type of access is not readily obtainable in 
today's bilateral system of negotiating air rights, since governments 
can only exchange access rights to their own countries and cannot, 
between themselves, deliver access to third countries, thus requiring 
piecemeal negotiating efforts to build the necessary package of rights;
     Access to a large number of gates and takeoff/landing 
slots, frequently at some of the world's most congested airports. It 
may become increasingly difficult for carriers to gain effective, 
direct access to certain airport facilities, including some in the 
United States;
     Considerable financial resources to establish and sustain 
commercially successful overseas hub systems; and
     The ability to obtain infrastructure and establish market 
presence in a new region quickly. Existing foreign investment laws can 
effectively preclude airlines from entering new markets in one of the 
most efficient means available: merger or acquisition.
    Some carriers are taking on these challenges directly and are 
striving to develop their own global systems of direct service. Other 
carriers have chosen to side-step the obstacles, turning instead to a 
new network-building technique: Cross-border marketing alliances that 
link traffic flows between established hub-and-spoke systems in key 
cities of the Western Hemisphere, Europe and Asia. Some of these 
alliances involve cross ownership, while others do not. Under this 
strategy, the linking of hubs requires indirect market access through 
code-sharing or other cooperative marketing arrangements. Although code 
sharing has become a widely-used marketing device for airlines and is 
currently the most prevalent form of commercial arrangement, further 
evolution of the industry and its regulatory environment may lead to 
new marketing practices that could supplement or supplant code sharing.
    Code sharing and other cooperative marketing arrangements can 
provide a cost-efficient way for carriers to enter new markets, expand 
their systems and obtain additional flow traffic to support their other 
operations by using existing facilities and scheduled operations. 
Because these cooperative arrangements can give the airline partners 
new or additional access to more markets, the partners will gain 
traffic, some stimulated by the new service, and some diverted from 
incumbents. In this way, cooperative arrangements can enhance the 
competitive positions of both partners in such a relationship.
    Increased international code sharing and other cooperative 
arrangements can benefit consumers by increasing international service 
options and enhancing competition between carriers, particularly for 
traffic to or from cities behind major gateways. By stimulating 
traffic, the increased competition and service options should expand 
the overall international market and increase overall opportunities for 
the aviation industry. U.S. airlines should be major beneficiaries of 
this expansion and the concomitant increased service opportunities, 
given their competitive advantages.
    Moreover, code sharing should also enhance domestic competition. 
Many [[Page 21843]] international passengers traveling to or from U.S. 
interior cities use domestic services for some portion of their 
international journey. Code sharing should increase competition among 
domestic carriers to carry those passengers on the domestic segment of 
their international journey.
    Although we expect the expansion of cooperative arrangements to be 
largely beneficial, there may be some negative effects. The greater 
traffic access of participants may give them considerable competitive 
muscle, and we may need to watch for harmful effects on competition. In 
addition, cooperative arrangements may affect the availability of civil 
aircraft to meet emergency airlift requirements. Our national defense 
establishment relies on U.S. civil aircraft committed to the Civil 
Reserve Air Fleet program to respond to worldwide crises. As set forth 
in our National Airlift Policy, the global mobility needs of our 
national defense establishment, and ensuring that the nation's defense 
air transportation needs are met during peace and contingency 
operations, are important considerations.
    Global systems and the growing use of code sharing may put 
significant competitive pressure on carriers whose strategy does not 
include participation in such systems or in code-sharing alliances, or 
whose options to participate may be limited due to the lack of 
potential partners. Such carriers will have to develop other commercial 
responses to compete effectively. We expect these pressures and 
responses to lead to a restructuring of service and airlines, similar 
to the U.S. domestic experience in the 1980s. Overall, cities and 
consumers will probably enjoy improved service and access to the 
international transportation system, although some cities may have 
fewer or less convenient service options in some markets than they have 
today. Similarly, although some airlines will grow and prosper, others 
will not. Moreover, we recognize that the balance of benefits in any 
particular alliance will depend on the specific structure of that 
arrangement between the partners. Overall, this evolution should expand 
the level and quality of international air service for consumers.
    Code-sharing arrangements are designed to address the preference of 
passengers and shippers for on-line service from beginning to end 
through coordinated scheduling, baggage- and cargo-handling, and other 
elements of single-carrier service. However, innovative service 
products, such as code sharing, can only respond to consumer 
preferences accurately, and thereby enable the marketplace to function 
efficiently, if consumers make choices based on full information. 
Therefore, we must ensure that airlines give consumers clear 
information about the characteristics of their service product, and 
that consumers can distinguish between code sharing and other forms of 
service.
    In addition to the two types of global networks (sole-carrier 
systems and joint carrier systems), there will continue to be a role 
for air services outside of global networks. The U.S. experience with 
deregulation indicates that--absent legal barriers to entry--
specialized competitors will enter the market and discipline the 
pricing and service behavior of the larger network operators. The 
introduction of technologically advanced aircraft such as the B-767, 
the MD-11 and the B-777 make direct service on longer or thinner routes 
economically viable. Moreover, airlines can viably serve heavily 
traveled routes with point-to-point service.
    In short, as indicated by our domestic experience, a variety of 
service forms--global networks with carriers participating either as 
the sole provider or as participant in a joint network, and regional 
niche carriers--can exist in the international aviation market and the 
competition among these services will enhance consumer benefits through 
efficient operations and low fares. Thus, our international aviation 
strategy should provide opportunities for all of these forms of service 
so that we realize the benefits from maximum competition among them.
    Our airlines are well positioned to be primary participants in all 
aspects of the future global marketplace. In recent years, our largest 
domestic carriers have become our primary international carriers, 
replacing specialized international operators. After operating in a 
deregulated domestic market for more than 15 years, our carriers have 
developed operating efficiencies that give them a cost advantage over 
their major foreign competitors. Moreover, the financial positions of 
our carriers are improving due to their cost-cutting measures and 
improving economic conditions. Coupled with their cost efficiencies, 
their improving financial status will further enhance their competitive 
capabilities. Over time, however, trends toward privatization and 
increased productivity of major foreign competitors may affect the 
current cost advantage U.S. airlines enjoy. We must try to provide our 
carriers with the flexible rights and economic environment that will 
enable them to respond to the dynamics of the marketplace.

Intergovernment Aviation Relations

    International air services between two nations have traditionally 
been conducted pursuant to bilateral agreements. The U.S. National 
Commission to Ensure a Strong Competitive Airline Industry and the 
European Union's Comite des Sages for Air Transport have both 
recognized that the bilateral system is limited in its ability to 
encompass the broad, multinational market access required by the new 
global operating systems. Consequently, progress in developing global 
networks has been and will be extremely fragmented and may preclude or 
limit the development of efficient operations. We must consider 
alternative forums for international aviation negotiations and 
agreements in which we can obtain the necessary broad access rights. We 
should examine the feasibility of achieving multilateral air service 
agreements among trading partners. Although such negotiations may be 
more complex and difficult because of the number of parties involved, 
they should be undertaken when they present a reasonable prospect for 
further liberalization.
    Moreover, some governments are taking steps to enhance their 
airlines' positions both by restricting the development of new, 
competitive services and by trying to overcome, through government 
fiat, their carriers' cost disadvantages that make it difficult for 
them to compete against U.S. airlines in a free market. These efforts 
underlie many of the disputes we face in international negotiations 
today.
    Such countries are responding to the highly competitive integrated 
and global air transportation market, in which their airlines may not 
be fully prepared to compete. Most foreign airlines are only beginning 
to adapt to the more competitive operating environment through such 
mechanisms as streamlining costs and realigning their operations to 
achieve greater productivity and operating economies. For state-owned 
airlines, privatization is an important initial step as it will lead 
those airlines to develop cost-efficient operations and, in the longer 
term, to expand their markets. These governments also may be reacting 
to the U.S. airlines' recent operating successes in the international 
aviation market, which are largely attributable to the U.S. airlines' 
productivity and competitive gains.
    Some national governments continue to give their national airlines 
financial aid. Some also distort the marketplace by permitting their 
national airlines to maintain ground-handling and other 
[[Page 21844]] monopolies, by denying airlines access to necessary 
airport facilities, or by allowing user fees that equalize cost 
differentials between carriers. These actions distort competition and 
deprive the aviation system and consumers of the benefits that greater 
cost efficiency and lower prices would encourage. In the long run, 
these efforts will work against the overall best interest of the world 
economy. Moreover, they will be unsuccessful in providing long-term 
protection against the developing global aviation systems because no 
individual government can control all facets of its airlines' 
marketplace.

U.S. Objectives

    We have outlined above our expectations about the future of the 
world air transportation industry and the role of U.S. airlines. We 
expect that international operations will depend more on traffic flows 
from multiple countries. In light of our goals, recent developments in 
the market and industry, and the positions and actions of our trading 
partners, we have designed our international aviation strategy to meet 
the following objectives:
     Increase the variety of price and service options 
available to consumers.
     Enhance the access of U.S. cities to the international air 
transportation system.
     Provide carriers with unrestricted opportunities to 
develop types of service and systems based on their assessment of 
marketplace demand:

--These opportunities should include unrestricted rights for airlines 
to operate between international gateways by way of any point and 
beyond to any point, at the discretion of airline management. Carriers 
should be able to pursue both direct service using their own equipment 
and indirect service through commercial relationships with other 
carriers;
--Service opportunities should not be restricted in any manner, such as 
restrictions on frequencies, capacity or equipment, so that carriers 
may provide levels of service commensurate with market demand;
--Carriers' ability to set prices should also be unrestricted to create 
maximum incentives for cost efficiencies and to provide consumers with 
the benefits of price competition and lower fares; and
--These opportunities should apply not only to scheduled passenger 
services, but also to cargo and charter opportunities, because of their 
growing importance to the world's economy. We have long recognized the 
significant differences among these types of operations. In particular, 
air cargo services have specific qualities and requirements that are 
significantly different from the passenger market. We will continue to 
follow our longstanding policy of seeking an open, liberal operating 
environment to facilitate the establishment and expansion of efficient, 
innovative and competitive air cargo services.

     Recognize the importance of military and civil airlift 
resources being able to meet defense mobilization and deployment 
requirements in support of U.S. defense and foreign policies.
     Ensure that competition is fair and the playing field is 
level by eliminating marketplace distortions, such as government 
subsidies, restrictions on carriers' ability to conduct their own 
operations and ground-handling, and unequal access to infrastructure, 
facilities, or marketing channels.
     Encourage the development of the most cost-effective and 
productive air transportation industry that will be best equipped to 
compete in the global aviation marketplace at all levels and with all 
types of service:

--Infrastructure needs should be addressed and unnecessary regulatory 
barriers eliminated.
--Privately held airlines have better incentives to reduce costs and 
respond to public demand. Therefore, as we have in the past, we will be 
supportive of governments wishing to privatize their airlines so that 
their privatization efforts will be successful; and
--Reduce barriers to the creation of global aviation systems, such as 
limitations on cross-border investments wherever possible.

Plan of Action

    We recognize that considerable time and effort will be required to 
achieve an open aviation regime worldwide. We can get there by making a 
concerted effort to eliminate the obstacles to that regime and by 
taking a more strategic and long-term approach to our overall 
international aviation policies. At a minimum, we must increase our 
focus on emerging markets and their contribution to global networks; 
build a coalition of like-minded trading partners committed to the 
principles of free trade in aviation services; work closely with our 
trading partners to address their concerns; develop new incentives for 
encouraging market reform, such as increased opportunities for cross-
border investment in airlines; and devise alternatives to the bilateral 
aviation system for achieving our objectives. We are launching our new 
initiatives to create freer trade in aviation services by taking the 
following steps:
     Extend invitations to enter into open aviation agreements 
to a group of countries that share our vision of liberalization and 
offer important flow traffic potential for our carriers even though 
they may have limited Third and Fourth Freedom traffic potential. This 
would assist the development of global systems and increase the 
momentum for further worldwide liberalization.
     Give priority to building aviation relationships between 
the United States and potential growth areas in Asia, South America and 
Central Europe. This recognizes the importance of these trading 
partners and the need to provide air transportation to support those 
developing trade markets. It will also make available new markets to 
build global networks.
     Renew efforts to achieve liberal agreements with trading 
partners with which our aviation relationships lag behind those of our 
general trade advancements, as we have done successfully with Canada.
     Emphasize the importance of sound economic analysis based 
on sufficient data in developing policies and strategies for achieving 
our overall aviation goals. This will enable us to remain focused on 
the overall strategic objectives, understand developments in the 
industry and market, and plan for the future.
     Seek changes in U.S. airline foreign investment law, if 
necessary, to enable us to obtain our trading partners' agreement to 
liberal arrangements to the extent it is consistent with U.S. economic 
and security interests.
     Increase our efforts to reach out to Congress and 
constituent groups, such as consumers, corporations with international 
perspectives (aircraft manufacturers, telecommunications, travel and 
tourism industries), cities, airports, airlines, labor and travel 
agents to learn their anticipated needs over a 3-5 year period. This 
will provide us with valuable information for developing our positions, 
as well as enlisting their support in pushing for greater 
liberalization.
     Establish stronger connections among U.S. government 
agencies whose functions are to promote U.S. business and trade 
interests (e.g., Departments of Commerce, State, and Transportation, 
Office of the United States Trade Representative, and the Export/Import 
Bank) as well as the Department of Defense, to ensure that we share a 
single vision of the future global marketplace [[Page 21845]] while 
meeting national security requirements.
    Given the diverse positions of our trading partners and their 
varying degrees of willingness to liberalize aviation relations, we 
must also have a strategy for dealing with countries that are not 
prepared or willing to join us in moving quickly to an unrestricted air 
service regime. Our approach is a practical one: It proposes to advance 
the liberalization of air service regimes as far as our partners are 
willing to go, and to withhold benefits from those countries that are 
not willing to move forward. Specifically, we will pursue the following 
strategy:
    1. We will offer liberal agreements to a country or group of 
countries if it can be justified economically or strategically. We will 
view economic value more broadly than we have in the past, in terms of 
both direct and indirect access and in terms of potential future 
development. Moreover, there may be strategic value in adopting liberal 
agreements with smaller countries where doing so puts competitive 
pressure on neighboring countries to follow suit.
    2. We recognize that some countries believe that they can resist 
the trend of economic forces and continue to control access to their 
markets tightly. We believe that they cannot, and that attempts to do 
so will ultimately fail. Nevertheless, we will work with these 
countries to develop alternatives that address their immediate concerns 
where this will advance our international aviation policy objectives. 
We will examine alternative approaches that may include departing from 
established methods of negotiation (perhaps negotiations with two or 
more trading partners); trying to develop service opportunities for the 
foreign airline to make service to the U.S. more economically 
advantageous for it; and continuing our efforts to help those 
governments and their constituencies appreciate the benefits that 
unrestricted air services can bring to their economies and industries.
    While we work with such countries, we can consider, in the interim, 
transitional or sectoral agreements.
    Transitional agreements--Under this approach, we would agree to a 
specified phased removal of restrictions and liberalization of the air 
service market. This approach contemplates that both sides would agree, 
from the beginning, to a completely liberalized air service regime that 
would come into effect at the end of a certain period of time.
    Sectoral agreements--Traditionally, aviation agreements have 
covered all elements of air transportation between two countries. 
However, as a first step, we can consider agreements that eliminate 
restrictions only on services in specific aviation sectors, such as air 
cargo or charter services.
    3. For countries that are not willing to advance liberalization of 
the market, we will maintain maximum leverage to achieve our 
procompetitive objectives. We can limit their airlines' access to the 
U.S. market and restrict commercial relations with U.S. airlines. When 
airlines request authority to serve restricted bilateral markets that 
is not provided for under an international agreement, we will consider 
their requests on a case-by-case basis in light of all our policy 
objectives, including, inter alia:
     Whether approval will increase the variety of pricing and 
service options available to consumers;
     Whether approval will improve the access of cities, 
shippers and travelers to the international air transportation system;
     The effect of granting code-sharing authority on the Civil 
Reserve Air Fleet program;
     The effect of the proposed transaction on the U.S. airline 
industry and its employees. In this regard, we will ascribe greater 
value to code-sharing arrangements where U.S. airlines provide the 
long-haul operations. We will also recognize the greater economic value 
of such arrangements where the services connect one hub to another; and
     Whether the transaction will advance our goals of 
eliminating operating and market restrictions and achieving 
liberalization.
    If aviation partners fail to observe existing U.S. bilateral 
rights, or discriminate against U.S. airlines, we will act vigorously, 
through all appropriate means, to defend our rights and protect our 
airlines.

Conclusion

    We are living through a period in which international aviation 
rules must change. Privatization, competition, and globalization are 
trends fueled by economic and political forces that will ultimately 
prevail. Governments and airlines that embrace these trends will far 
outpace those that do not. The U.S. government will be among those that 
embrace the future.

    Authority citation: 49 U.S.C.40101, 40113, 41102, 41302, and 
41310.

    Dated: April 25, 1995.
Patrick V. Murphy,
Acting Assistant Secretary for Aviation and International Affairs, 
Department of Transportation.
[FR Doc. 95-10584 Filed 5-2-95; 8:45 am]
BILLING CODE 4910-62-P